Question

QUESTION 15 Refer to the accompanying graph. If a tax is placed on a good and all else is held constant, we would assume that the supply curve would: shift from S1 to S3. remain at S1. shift from S1 to S2. shift from S2 to S1. shift from S2 to S3.

Answer 1

If a tax is placed on a good and all else is held constant, we would assume that the supply curve would shift from S1 TO S2. Taxation shifts a supply curve to the left. At a given level of demand, taxation's reduction of incentives will result in a decrease in the production of goods or services. The equilibrium price will rise and the equilibrium quantity will fall.The shift to the left shows that, when supply decreases, firms produce and sell a smaller quantity at each price. The upward shift represents the fact that supply often decreases when the costs of production increase, so producers need to get a higher price than before in order to supply a given quantity of output.

(In the absence of graph it is assumed that S1 to S2 means shift towards left)